Gold’s rally will continue

Gold has gone through volatile trading the past few weeks however, the "wall of worry" which may have fell when gold dropped, is still prevalent and it will continue to support gold to higher price levels.

Mark Hulbert
Sept. 7, 2011, 12:01 a.m. EDT
Market Watch

CHAPEL HILL, N.C. (MarketWatch) — Gold’s sentiment stars are aligned in favor of bullion rallying to even higher prices.

This alignment represents a big shift from the situation prevailing in the last half of July, when I last devoted a column to gold sentiment. I wrote then that the wall of worry that previously had existed in the gold market had largely disintegrated, replaced by excitement and exuberance. ( Read my July 19 column on gold market sentiment. )

To be sure, the resultant contrarian-based caution was premature. But contrarians can claim some vindication in the huge drop that bullion suffered in late August — when spot gold dropped from an intraday high of $1,929.00 on Aug. 23 to an intraday low of $1,702.80 just two trading days later.

As I wrote in July, the excitement that then existed in the gold market was “close to the fever pitch that prevailed in late April. Soon after that previous crescendo of bullish enthusiasm, of course, gold encountered a stunning air pocket and fell more than $100 per ounce.”

Regardless, that huge two-day drop in late August did scare a lot of erstwhile bulls into becoming almost stubbornly bearish — which, from a contrarian point of view, is bullish. As a result, even though gold bullion is now back within shouting distance of its August highs, gold market sentiment remains remarkable subdued.

Consider the average recommended gold market exposure among a subset of the shortest-term gold market timers tracked by the Hulbert Financial Digest (as measured by the Hulbert Gold Newsletter Sentiment Index, or HGNSI). That average currently stands at 40.3%.

To put that in context, consider that in late July, when an ounce of gold was trading for nearly $300 less, the HGNSI stood at 67%.

In other words, even though gold bullion is 18% higher today than then, the average gold timer is only slightly more than half as bullish. Since the typical pattern is for gold timers to become more and less bullish as the market rises and falls, respectively, this development is bullish from a contrarian point of view.

The bottom line? What has played out in recent weeks is the bullish scenario that I outlined nearly two months ago: In my July 19 column, I wrote that it would be bullish for the yellow metal if, in the wake of subsequent gold market weakness, “traders were to quickly run for the exits. That would suggest that there remains an underlying climate of skittishness about gold, which would allow the wall of worry to be quickly rebuilt.”

That wall of worry appears today to be quite robust.

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